LGPS funds ‘overestimate risks’ from local investment

Local Government Pension Schemes should not be afraid of investing more of their assets in their local areas, according to a new report. The study, by Sheffield Political Economy Research unit, said that funds need to overcome their traditional reluctance to do so due to the “double exposure” risk in which a local economic downturn might also be reflected in lower returns on investments.
However, it said that the financial crisis had exposed the dangers of investing in London-centred capital markets.
It said: “The regulations, such as valuation cycles, that encourage pension funds to over-invest in so-called conventional assets should be reviewed, since the crisis proves that such assets are not as reliable as we might normally assume.”
It added that, although it was unwise for a single pension fund to be exposed to a single, or small number of local economies, “it is nevertheless not unreasonable to expect an even distribution of pension fund capital by geography”.